Bunds rise as periphery hit by profit-taking

LONDON: German Bund futures rose on Friday as investors locked in profits in higher-yielding euro zone government debt after their sharp rally this week, which drove Italian two-year yields to their lowest levels in 15 months.

Italian and Spanish government bonds underperformed German benchmarks, but the moves are expected to remain modest with Italy seen continuing to outperform Spain after a massive take-up by its banks of European Central Bank cash this week.

Italian two-year yields rose 17 basis points to 1.97 percent, having fallen to a 15-month low of 1.73 percent in the previous session, while the Spanish equivalent rose 10 bps to 2.39 percent.

"We've seen better selling. They've had a decent run and there is some profit-taking ahead of the weekend. Not a lot of real money, mostly fast money," one trader said.

Italian 10-year yields rose eight bps to 5.04 percent after briefly probing below 5 percent on Thursday for the first time since August, bringing them close to parity with Spanish yields.

Spanish 10-year yields were up five bps at 4.94 percent and the gap between them was seen closing in coming days as Spain is under pressure after recent data showed it overshot its budget target last year and the country frontloaded its debt issuance, having now issued almost 40 percent of its 2012 goal.

"I'm not sure the selloff will extend further. We could see further spread compression in the coming days and weeks. The three-year LTRO...will offer these markets some support," BNP Paribas strategist Patrick Jacq said.

"In the very near term 10-year BTPs could fall below 5 percent to between 4.90-4.95 pct."

The March Bund future was last 30 ticks higher on the day at 139.60 with German 10-year yields three bps lower at 1.838 percent.

German Bunds have also benefited from the ECB's cash largesse as the market remains jittery over the outcome of Greece's efforts to get private bondholders to take losses on their debt and help it shave 100 billion euros off its debt mountain.

The International Swaps and Derivatives Association said on Thursday that Greece had not breached the terms of debt insurance contracts by preparing to force losses on private bondholders while exempting official creditors. But market participants still expect Athens' efforts to reduce its debt burden to prompt an eventual payout on credit default swaps.